Monthly Outlook: Future Expectations of Ethereum

The approval of the Bitcoin spot ETF has strengthened the image of BTC as a store of value asset, solidifying its position as a macro asset. In contrast, Ethereum's positioning in the crypto space is still not clear enough. Some competitive public chains have affected Ethereum's status as the preferred platform for decentralized applications. The growth of Ethereum's Layer 2 networks and the decrease in ETH burn rates also seem to impact its value accumulation methods.

However, the long-term outlook for Ethereum remains optimistic. It has unique advantages in the smart contract platform, including a robust developer ecosystem with Solidity, the widespread application of the Ethereum Virtual Machine, the importance of ETH as collateral in DeFi, and the decentralization and security of the mainnet. As the trend of tokenization accelerates, ETH may gain more positive momentum compared to other layer one networks.

Historical trading data shows that ETH embodies both store of value and technological innovation characteristics. It is highly correlated with BTC, yet can perform independently during BTC's long-term uptrend. It is expected that ETH will continue to integrate these two features and may achieve unexpected growth in the second half of 2024.

The role of ETH is diverse; it is seen as a super currency that controls supply through halving, and it is also regarded as an internet bond that provides non-inflationary staking yields. With the expansion of layer two networks and the rise of re-staking technology, new concepts such as "settlement layer assets" and "general proof of work assets" have also emerged.

These individual statements cannot fully reflect the vitality of Ether. The increasing uses of Ether complicate the assessment of its value, making it difficult to define with a single standard. The interweaving of multiple concepts can sometimes create confusion, obscuring the true driving forces behind the rising value of Ether.

Spot ETFs are extremely important for Bitcoin, as they clarify the regulatory framework and attract new funds. These ETFs reshape the industry landscape, disrupting the cyclical pattern of funds shifting from Bitcoin to Ether and then into high-risk alternative assets.

Once the Ethereum spot ETF is approved, it will be able to access capital sources currently only open to Bitcoin. The logic for approving the Bitcoin spot ETF also applies to Ethereum, as futures prices are closely related to spot prices and can effectively monitor market behavior.

Some high-performance integrated chains are gradually encroaching on Ethereum's market share. These chains offer high-speed, low-cost transactions, causing activities to shift from the Ethereum mainnet. Last year, the DEX trading volume of a certain ecosystem increased from 2% to 21%.

The differences between these layer one networks and Ethereum are more pronounced. They no longer rely on the Ethereum Virtual Machine, and applications are designed from scratch to create a unique user experience. The overall strategy enhances inter-application collaboration and addresses bridging issues.

It is still too early to judge success solely based on activity metrics driven by incentives. Some Ethereum Layer 2 networks saw a significant drop in trading volume after the airdrop. The share of a certain public chain in the total trading volume of DEXs significantly increased during the airdrop period.

The leading Ethereum Layer 2 networks account for 17% of the total trading volume on DEX, plus 33% from Ethereum itself. In these networks, ETH is the base fuel asset. There is still a huge growth potential for future demand.

From the perspective of stablecoin supply, activity is still concentrated on Ethereum. Emerging chains lack the trust and reliability to support large-scale capital. Large capital holders tend to reduce risk through Ethereum. The growth rate of stablecoin supply on Ethereum's layer two networks exceeds that of certain layer one networks.

The development of layer 2 networks has sparked discussions: it reduces the demand for block space on layer 1 networks and may support transaction fees for non-ETH transactions. However, a deeper analysis shows that this is not a negative impact on ETH.

The cost of ETH staking is low, allowing for long-term accumulation without the need to sell. Staking has become a magnet for ETH liquidity, with growth far surpassing the issuance rate. The rise of layer two networks has further exacerbated the tightening of ETH liquidity.

Core financial services and governance activities still rely on the first layer network, ensuring the fundamental demand for Ether. Large fund holders are more likely to stay on the first layer network before the second layer network is fully decentralized.

The development of layer two networks has not weakened ETH; rather, it has promoted the appreciation of ETH. It is both a driving force behind the growing demand for ETH and reinforces the core value of ETH.

Ethereum has some difficult-to-quantify but important advantages:

1. ETH plays a key role in the DeFi space and is widely used in lending and trading.
2. Ethereum has achieved several major upgrades while promoting decentralization and maintaining its innovative capabilities.
3. Layer 2 network innovations are rapidly advancing, creating diverse application scenarios for Ether.
4. The Ethereum Virtual Machine is widely spread, and the popularity of the Solidity language has promoted the maturation of the auditing industry and the developer ecosystem.
5. The trend of tokenization is beneficial for Ethereum, as its maturity and developer base are advantages.
6. The supply dynamics of Ether are unique, and staking has reduced selling pressure.

ETH and BTC are closely related, but they may briefly decouple at specific times. In 2023, a special phenomenon occurred in their correlation. After the United States approved the Bitcoin spot ETF, this pattern changed.

In the coming months, ETH may have upside surprises. Staking and Layer 2 network growth continue to absorb ETH liquidity. The widespread application of EVM and Layer 2 innovations solidify ETH's position. The importance of the US spot ETH ETF should not be underestimated.

Structural demand drivers and technological innovation will keep Ether in a unique position.